Deck 5: Merchandising Operations and the Accounting Cycle

Question 1

FOB shipping point means that the title to the goods passes to the purchaser upon receipt of the goods and the seller is responsible for the cost of the freight.

Answer 1

False

Question 2

The entry to record the return of $250 of inventory to a supplier under the perpetual inventory system is recorded with a debit to:

A)Accounts Payable and a credit to Purchases Discounts.
B)Purchases Returns and Allowances and a credit to Accounts Payable.
C)Accounts Payable and a credit to Inventory.
D)Inventory and a credit to Accounts Payable.

Answer 2

C

Question 3

Gross margin minus expenses equals gross profit.

Answer 3

False

Question 4

Inventory includes all goods that the company owns and expects to use in normal operations.

Question 5

The entry to record the purchase of inventory on account in a perpetual inventory system includes a debit to the Purchases account.

Question 6

Purchase returns of merchandise decrease the liability to a creditor.

Question 7

Net sales is equal to sales revenue plus sales returns and minus sales discounts.

Question 8

When the seller accepts a return of undamaged goods from the purchaser, the seller's journal entries would include two entries, if they are using a perpetual inventory system.

Question 9

In a purchase discount, the larger the quantity of merchandise purchased, the lower the price per item.

Question 10

What is the difference between a sales return and a sales allowance?

A)A sales return reduces the amount receivable from the customer, but an allowance does not.
B)A sales return involves an adjustment to Inventory, but a sales allowance does not.
C)A sales return requires a debit to Sales returns and allowances, but a sales allowance does not.
D)A sales allowance is deducted from Sales revenue to calculate net sales, but a sales return is not.

Question 11

Inventory is a current liability on the balance sheet.

Question 12

Gross margin is equal to net sales plus cost of goods sold.

Question 13

Sales discounts is a contra account and has a normal credit balance.

Question 14

Credit terms of 1/15 n/30 means the purchaser can deduct 1% of the invoice price if paid within 15 days.

Question 15

Cost of goods sold is an operating expense.

Question 16

Define gross margin and operating income. Explain how they are used in evaluating a company.

Question 17

A seller requesting payment will send the purchaser a purchase order.

Question 18

Sales revenue minus sales returns and allowances and sales discounts equals:

A)gross margin.
B)income from operations.
C)cost of goods sold.
D)net sales.

Question 19

Sales revenue and Net sales are synonymous terms.

Question 20

Quantity discounts offered by suppliers for large shipments of inventory are always recorded separately.

Question 21

Using a perpetual inventory system, the entry to record the purchase of merchandise on account involves a:

A)debit to Inventory.
B)debit to Accounts Payable.
C)credit to Inventory.
D)credit to Cash.

Question 22

Credit terms of 1/10 n/30 indicates that the buyer is:

A)allowed a 10% discount if payment is made within 30 days.
B)allowed a 1% discount if payment is made within 10 days.
C)allowed a 1% discount if payment is made within 30 days.
D)allowed a 30% discount if payment is made within 10 days.

Question 23

If the shipping terms are FOB shipping point and the freight bill is $200, the purchaser, using a perpetual inventory system would record payment of the freight with a debit to:

A)Inventory and credit to Cash for $200.
B)Accounts Payable and credit to Inventory for $200.
C)Inventory and credit to Purchases Discounts for $200.
D)Purchases Discounts and credit to Inventory for $200.

Question 24

When a discount is taken for prompt payment under a perpetual inventory system, the purchaser would credit:

A)Accounts Payable.
B)Accounts Receivable.
C)Purchases Discounts.
D)Inventory.

Question 25

When the buyer pays the freight costs, the entry to record the payment under a perpetual inventory system would include a debit to:

A)Delivery Expense.
B)Purchases Discounts.
C)Inventory.
D)Freight In.

Question 26

Day Company purchased $3,000 of merchandise on credit, terms 3/15 n/30. The entry to record payment for the merchandise within the discount period under a perpetual inventory system would include a:

A)debit to Inventory of $1,940.
B)debit to Accounts Payable of $1,940.
C)credit to Purchase Discounts of $90.
D)credit to Inventory of $90.

Question 27

A company makes a purchase of $2,000 of inventory, subject to credit terms of 3/10 n/45 and returns $500 of inventory prior to payment. What is the amount of the payment assuming payment is made within the discount period?

A)$1,500
B)$1,455
C)$1,440
D)$1,560

Question 28

Which of the following credit terms allows for a cash discount?

A)n/30
B)n/eom
C)n/60
D)1/10 n/30

Question 29

Mars Company purchased $2,500 of merchandise on account, terms 3/10 n/60. If payment was made within the discount period, the entry to record the payment under a perpetual inventory system would include a credit to:

A)Cash of $2,425.
B)Inventory of $2,352.
C)Accounts Payable of $2,400.
D)Cash for $2,400.

Question 30

The seller is responsible for the shipping costs when the shipping terms are:

A)FOB destination.
B)COD destination.
C)FOB shipping point.
D)COD shipping point.

Question 31

When the seller accepts a return of goods from the purchaser originally sold on account, the seller's journal entry would include a debit to:

A)Sales Discounts and credit to Cash.
B)Sales Returns and Allowances and credit to Accounts Receivable.
C)Sales Returns and Allowances and credit to Sales Discounts.
D)Sales Revenue and credit to Cash.

Question 32

The buyer is responsible for the shipping costs when the shipping terms are:

A)FOB destination.
B)COD destination.
C)FOB shipping point.
D)COD shipping point.

Question 33

The entry to record the sale of merchandise for cash includes a:

A)debit to Accounts Receivable.
B)credit to Sales Discounts.
C)debit to Sales Revenue.
D)credit to Sales Revenue.

Question 34

A merchandiser purchases inventory on account under a perpetual inventory system with terms of 2/10 n/30. The merchandiser would:

A)credit Inventory on date of payment if the discount is taken.
B)credit Inventory on date of payment if the discount is not taken.
C)credit Purchases Discounts on date of purchase if the discount is taken.
D)debit Purchases Discounts on date of purchase if the discount is not taken.

Question 35

When the seller is liable for the shipping costs, the payment for the freight in the seller's accounts is recorded with a debit to:

A)Delivery Expense or Freight Out.
B)Freight In.
C)Inventory.
D)Cash.

Question 36

Under a perpetual inventory system, the entry to record the cost of goods sold would include a debit to:

A)Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
B)Inventory and a credit to Sales Revenue for the retail price of the inventory.
C)Cost of Goods Sold and a credit to Inventory for the cost of the inventory.
D)Inventory and a credit to Cost of Goods Sold for the cost of the inventory.

Question 37

If a purchaser returns goods purchased on account to the supplier under a perpetual inventory system, the purchaser would debit:

A)Inventory and credit Accounts Payable.
B)Accounts Payable and credit Inventory.
C)Inventory and credit Accounts Receivable.
D)Accounts Receivable and credit Inventory.

Question 38

A purchase return or allowance under a perpetual inventory system is credited to:

A)Accounts Payable.
B)Purchase Returns and Allowances.
C)Inventory.
D)Purchases.

Question 39

Under a perpetual inventory system, the entry to record a sale on account would include a debit to:

A)Accounts Receivable and a credit to Sales Revenue for the retail price of the inventory.
B)Inventory and a credit to Sales Revenue for the retail price of the inventory.
C)Cost of Goods Sold and a credit to Inventory for the retail price of the inventory.
D)Accounts Receivable and a credit to Sales Revenue for the cost of the inventory.

Question 40

Green Company purchased $3,600 of merchandise on account, terms 2/10 n/30. If payment was made after the expiration of the discount period and a perpetual inventory system is used, the entry to record the payment would include a:

A)credit to Inventory of $3,600.
B)credit to Cash of $3,528.
C)credit to Cash of $3,600.
D)debit to Accounts Payable of $3,528.

Question 41

The entries to record a $5,000 cash sale under a perpetual inventory system, when the cost of the merchandise is $3,200, include a:

A)debit to Inventory for $5,000.
B)debit to Sales Revenue for $5,000.
C)credit to Cost of Goods Sold for $3,200.
D)debit to Cost of Goods Sold for $3,200.

Question 42

Details of a purchase invoice, credit terms, and a purchase return are shown below. Assume the credit memo was received and payment made within the discount period. Compute the following:
a)amount of discount
b)amount paid by purchaser, within the discount period, including freight, if applicable
c)amount paid by purchaser if paid after expiration of discount including freight, if applicable

Question 43

Table 5-9
Reid Art Supply Company uses a perpetual inventory system. The company had the following transactions during August, 2019:
Record the August journal entries for Reid Art Supply.

Question 44

The entries to record a $4,500 sale on account under a perpetual inventory system, when the cost of the merchandise is $3,000, include a:

A)debit to Inventory for $3,000.
B)credit to Sales Revenue for $3,000.
C)debit to Sales Revenue for $4,500.
D)credit to Inventory for $3,000.

Question 45

Tobermory Merchandising had the following transactions during May:
May 5 Purchased $2,700 of merchandise on account, terms 3/15 n/60, FOB shipping point.
9 Paid transportation cost on the May 5 purchase, $250.
10 Returned $400 of defective merchandise purchased on May 5.
15 Paid for the May 5 purchase, less the return and the discount.
Required:
Assuming the perpetual inventory system is used, prepare the journal entries to record the above transactions.

Question 46

Under a perpetual inventory system, the entry to record the return of inventory sold on account for $360 with a cost of $210 would be recorded by the seller as a:

A)credit to Accounts Receivable for $210.
B)credit to Sales Returns and Allowances for $210.
C)debit to Sales Revenue for $360.
D)debit to Inventory for $210.

Question 47

Details of purchase invoices including shipping terms, credit terms, and returns appear below. Compute the total amount to be paid in full settlement of each invoice, assuming that credit for returns is granted before the expiration of the discount period and payment is made within the discount period.

Question 48

To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:

A)credit to Inventory.
B)debit to Accounts Payable.
C)debit to Sales Revenue.
D)credit to Cost of Goods Sold.

Question 49

To update the inventory records for the sale of merchandise under a perpetual inventory system, the entry would include a:

A)debit to Inventory.
B)credit to Accounts Payable.
C)debit to Sales Revenue.
D)debit to Cost of Goods Sold.

Question 50

Romeo Merchandising had the following transactions in June. Prepare journal entries for these transactions assuming Romeo uses a perpetual inventory system.
June 2 Romeo received an $18,000 invoice from one of its suppliers. Terms
were 2/10 n/30, FOB shipping point. Romeo paid the freight bill
amounting to $2,000.
4 Romeo returned $2,500 of the merchandise billed on June 2 because it
was defective.
5 Romeo sold $8,000 of merchandise on account, terms 3/15 n/30.
The cost of the merchandise sold was $5,100.
10 Romeo paid the invoice dated June 2, less the return and the discount.
15 A customer returned $2,500 of merchandise sold on June 5. The cost of
the returned merchandise that was placed back in inventory was $1,450.
19 Romeo received payment on the remaining amount due from the sale of
June 5, less the return and the discount.

Question 51

A merchandiser received payment in full within the discount period on a $5,000 sales invoice, terms 2/15 n/30. The journal entry would include a:

A)debit to Cash for $5,000.
B)credit to Accounts Receivable for $5,000.
C)credit to Accounts Receivable for $4,900.
D)credit to Sales Discounts for $100.

Question 52

Under a perpetual inventory system, the entry to record the return of inventory sold on account for $250 with a cost of $185 would be recorded by the seller as a:

A)debit to Accounts Receivable for $250.
B)debit to Sales Returns and Allowances for $185.
C)credit to Sales Revenue for $250.
D)credit to Cost of Goods Sold for $185.

Question 53

Under a perpetual inventory system, the entries to record a $3,400 sales return for undamaged goods on an original cash sale when the merchandise had a cost of $1,500 include a debit to:

A)Accounts Receivable of $3,400.
B)Cost of Goods Sold of $1,500.
C)Sales Returns and Allowances of $1,500.
D)Inventory of $1,500.

Question 54

The adjusting entry to record inventory shrinkage would include a debit to the cost of goods sold account in a perpetual inventory system.

Question 55

Table 5-10

Refer to Table 5-10. Record the July transactions in the general journal.

Question 56

Which of the following is true about freight in?

A)Freight in is added to the cost of merchandise inventory.
B)Freight in is a selling expense.
C)Freight in is an operating expense.
D)Freight in is deducted from Accounts payable.

Question 57

Michelin Jewellers completed the following transactions. Michelin Jewellers uses the perpetual inventory system. On April 2, Michelin sold $9,000 of merchandise to a customer on account with terms of 3/15, n/30. Michelin's cost of the merchandise sold was $5,500. On April 4, the customer reported damaged goods and Michelin granted a $1,000 sales allowance. On April 10, Michelin received payment from the customer. Which of the following entries correctly records the cash receipt on Michelin's books?

A) $\begin{array} { | l | r | r | } \hline \text { Cash } & 7,760 & \\\hline \text { Sales discount } & 240 & \\\hline \text { Accounts receivable } & & 8,000 \\\hline\end{array}$
B) $\begin{array} { | l | r | r | } \hline \text { Accounts receivable } & 8,000 & \\\hline \text { Sales discount } & & 240 \\\hline \text { Cash } & & 7,760 \\\hline\end{array}$
C) $\begin{array} { | c | r | r | } \hline \text { Cash } & 8,000 & \\\hline \text { Accounts receivable } & & 8,000 \\\hline\end{array}$
D) $\begin{array} { | c | r | r | } \hline \text { Cash } & 7,760 & \\\hline \text { Accounts receivable } & & 7,760 \\\hline\end{array}$

Question 58

A merchandiser received payment in full after the expiration of the discount period on a $3,000 sales invoice, terms 3/15 n/30. The journal entry would include a:

A)debit to Cash for $2,910.
B)credit to Accounts Receivable for $2,910.
C)debit to Sales Discount of $90.
D)debit to Cash for $3,000.

Question 59

Under a perpetual inventory system, the entries to record a $2,600 sales return of undamaged goods for a sale originally made on account, when the merchandise had a cost of $1,200, include a:

A)debit to Inventory of $1,200.
B)debit to Sales Returns and Allowances of $1,200.
C)credit to Cost of Goods Sold of $2,600.
D)credit to Sales Returns and Allowances of $1,200.

Question 60

Eastern Outfitters sold $2,500 of inventory to a customer on account, terms 3/15 n/40. Freight terms were FOB shipping point and freight charges totalled $150. The entry to record the sale would include a:

A)credit to Accounts Receivable for $2,350.
B)debit to Sales Revenue for $2,500.
C)credit to Sales Revenue for $2,500.
D)debit Accounts Receivable for $2,650.

Question 61

Table 5-10
The December 31, 2019 adjusted trial balance for Camptown Company is shown below.
Using the information from Table 5-10 prepare an income statement in single-step format and the closing entries for Camptown Company.

Question 62

Under a perpetual inventory system, which accounts would be closed to Income Summary with credits?

A)Sales Returns and Allowances, Sales Revenue, and Inventory
B)Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold
C)Sales Revenue and Cost of Goods Sold
D)Sales Returns and Allowances and Sales Revenue

Question 63

A single-step format of the income statement will always have fewer sub-totals than the multi-step income statement format.

Question 64

The adjusting entry required when the inventory counted is greater than the balance in the inventory account has a credit to Cost of Goods Sold.

Question 65

An adjusted trial balance is shown below. $$\begin{array} { | l | r | r | } \hline &{ \text { Debit } } & \text { Credit } \\\hline \text { Cash } & \$ 12,600 & \\\hline \text { Accounts receivable } & 2,400 & \\\hline \text { Prepaid rent } & 800 & \\\hline \text { Inventory } & 28,000 & \\\hline \text { Accounts payable } & & \$ 4,200 \\\hline \text { Salary payable } & & 1,000 \\\hline \text { Notes payable } & & 800 \\\hline \text { Capital } & & 13,800 \\\hline \text { Withdrawals } & 1,000 & \\\hline \text { Sales revenue } & & 96,000 \\\hline \text { Sales reburns and allowances } & 1,600 & \\\hline \text { Sales discounts } & 400 & \\\hline \text { Cost of goods sold } & 25,000 & \\\hline \text { Salary expense } & 21,000 & \\\hline \text { Rent expense } & 14,000 & \\\hline \text { Amortization expense } & 8,500 & \\\hline \text { Supplies expense } & 500 & \\\hline \text { Total } & \$ 115,800 & \$ 115,800 \\\hline\end{array}$$ What will the final balance in Capital be after the closing entries?

A)$37,800
B)$12,700
C)$24,000
D)$36,800

Question 66

Table 5-1 $$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 480,000 \\\hline \text { Cost of goods sold } & 300,000 \\\hline \text { Sales discounts } & 20,000 \\\hline \text { Sales retums and allowances } & 15,000 \\\hline \text { Operating expenses } & 85,000 \\\hline \text { Interest revenue } & 5,000 \\\hline\end{array}$$

-Referring to Table 5-1, what is gross margin?

A)$145,000
B)$105,000
C)$140,000
D)$90,000

Question 67

In the closing entry process, the sales returns and allowances account is debited.

Question 68

Inventory held by a business is a(n)________ and when sold becomes a(n)________.

A)liability; withdrawal
B)asset; expense
C)liability; asset
D)asset; contra asset

Question 69

Operating expenses are divided into manufacturing expenses and selling expenses on the income statement.

Question 70

The income from operations is presented on both the multi-step and single-step income statements.

Question 71

Which accounts are affected in the closing process under a perpetual inventory system?

A)Gross Margin and Cost of Goods Sold
B)Cost of Goods Sold, Sales Returns and Allowances, and Sales Discounts
C)Gross Margin, Sales Returns and Allowances, and Sales Discounts
D)Operating Expenses, Sales Revenue, and Purchases

Question 72

In a perpetual inventory system, the closing entries include a credit to the Inventory account in an amount that equals the ending inventory, and a debit to the Inventory account in an amount that equals the beginning inventory.

Question 73

A company's ledger shows an Inventory balance of $20,000 and a physical count of the inventory shows $19,000. Which of the following entries is needed to record the shrinkage?

A) $\begin{array} { | r | r | r | } \hline \text { Cost of goods sold } & 1,000 & \\\hline \text { Shrinkage expense } & & 1,000 \\\hline\end{array}$
B) $\begin{array} { | r | r | r | } \hline \text { Inventory } & 1,000 & \\\hline \text { Cost of goods sold } & & 1,000 \\\hline\end{array}$
C) $\begin{array} { | c | r | r | } \hline \text { Cost of goods sold } & 1,000 & \\\hline \text { Inventory } & & 1,000 \\\hline\end{array}$
D) $\begin{array} { | c | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Inventory } & & 1,000 \\\hline\end{array}$

Question 74

The multi-step income statement format shows subtotals to highlight significant relationships.

Question 75

Underwater Adventures has the following account balances on August 31, 2019: The following information as at August 31, 2019 was also available:
a. A physical count of items showed $1,200 of supplies on hand.
b. An inventory count showed inventory on hand of $66,400.
c. The equipment has an estimated useful life of eight years and is expected to have no salvage value.
d. Unearned sales revenue of $1,000 was earned.
Required:
1. Prepare the necessary adjusting journal entries at August 31, 2019. For simplicity all operating expenses are combined into a single operating expense account for financial statement purposes. Use the normal account name for the adjusting journal entries.
2. Prepare a classified balance sheet based on adjusted account balances.

Question 76

Table 5-1 $$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 480,000 \\\hline \text { Cost of goods sold } & 300,000 \\\hline \text { Sales discounts } & 20,000 \\\hline \text { Sales retums and allowances } & 15,000 \\\hline \text { Operating expenses } & 85,000 \\\hline \text { Interest revenue } & 5,000 \\\hline\end{array}$$

-Referring to Table 5-1, what is net sales revenue?

A)$400,000
B)$445,000
C)$415,000
D)$455,000

Question 77

Under a perpetual inventory system, the adjusting entry to account for inventory shrinkage would include a:

A)credit to Miscellaneous Expense.
B)credit to Cost of Goods Sold.
C)credit to Inventory.
D)debit to Miscellaneous Expense.

Question 78

Table 5-1 $$\begin{array} { | l | r | } \hline \text { Sales revenue } & \$ 480,000 \\\hline \text { Cost of goods sold } & 300,000 \\\hline \text { Sales discounts } & 20,000 \\\hline \text { Sales retums and allowances } & 15,000 \\\hline \text { Operating expenses } & 85,000 \\\hline \text { Interest revenue } & 5,000 \\\hline\end{array}$$

-Referring to Table 5-1, what is the income from operations?

A)$20,000
B)$55,000
C)$60,000
D)$190,000

Question 79

The major revenue of a merchandiser is ________ while the major expense(s)is (are)________.

A)sales revenue; cost of goods sold
B)gross margin; operating expenses
C)income from operations; cost of goods sold
D)sales revenue; operating expenses

Question 80

Gross margin minus operating expenses equals income from operations on a multi-step income statement.